What is Commercial Paper? A Comprehensive Legal Overview

Q: How does commercial paper work?

It is sold at a discount to its face value and matures within a short period, typically between two and 270 days.

Q: Who can issue commercial paper?

Only corporations with high credit ratings can issue commercial paper.

Q: What are the risks of investing in commercial paper?

Since it is unsecured, there is a risk of default if the issuing corporation faces financial difficulties.

Q: Can individuals invest in commercial paper?

Individuals typically invest in commercial paper indirectly through money market funds.

Definition & Meaning

Commercial paper is a type of unsecured, short-term borrowing that corporations with strong credit ratings use to meet immediate financial needs. Typically, it is issued to finance accounts receivable and inventory purchases. Commercial paper is sold at a discount to its face value, which reflects the prevailing market interest rates. The minimum denomination for commercial paper is usually $100,000, making it more accessible to institutional investors, while smaller investors often purchase it indirectly through money market funds.

This financial instrument generally has maturities ranging from two to 270 days and may include various forms such as promissory notes, drafts, bills of exchange, checks, and warehouse receipts.

Table of content

Legal Use & context

Commercial paper is primarily used in corporate finance and is relevant in legal contexts involving financial transactions and securities regulation. It is governed by laws related to debt instruments and may involve legal forms for issuance and compliance. Users can manage some aspects of commercial paper transactions themselves using legal templates from US Legal Forms, particularly for documentation needs.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: A corporation needs to finance its inventory for the upcoming holiday season. It issues $1 million in commercial paper at a discount, allowing it to quickly access the funds needed without taking on long-term debt.

Example 2: A company issues commercial paper to cover its accounts receivable gap while waiting for customer payments. This allows the company to maintain liquidity and manage operational costs effectively. (hypothetical example)

Comparison with related terms

Term	Definition	Key Differences
Commercial Paper	Unsecured, short-term debt issued by corporations.	Typically has maturities of 2 to 270 days and is issued at a discount.
Bonds	Long-term debt securities issued by corporations or governments.	Bonds have longer maturities, often exceeding one year, and are usually secured.
Notes Payable	Written promises to pay a specified amount on a certain date.	Notes can be secured or unsecured and may have varying terms beyond short-term.

Common misunderstandings

What to do if this term applies to you

If you are considering investing in commercial paper or issuing it as a corporation, it is essential to understand the associated risks and regulations. You can explore US Legal Forms for templates related to commercial paper transactions, which can help streamline the process. If your situation is complex or involves significant amounts, consulting a legal professional is advisable.

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Quick facts

Typical denominations: $100,000 or more
Maturities: 2 to 270 days
Interest: Issued at a discount to face value
Credit requirement: High credit ratings are necessary

Key takeaways

Frequently asked questions

What is commercial paper?

Commercial paper is an unsecured, short-term debt instrument issued by corporations to finance immediate needs.